This lack of competition, coupled with a concerted attempt by insurers to recoup long term profitability, has led to market conditions deteriorating and increasingly challenging renewal discussions.
Our 2020 Professional Indemnity (PI) market update described how premiums had increased, pivoting from a period of stability where premiums had reduced as underwriters actively competed for business. We explained that this position had changed in recent years, with a “hard” market cycle for insureds which was established well before the emergence of coronavirus (COVID-19). In this article we look at the latest trends, the uncertainties around the increased risks that insurers may face as well as how the impact of the pandemic will colour the PI market in the coming months.
We began to see a significant change in the PI market in early 2018. Following several large losses, a number of insurers highlighted their concerns on the underperformance of PI as a class of business. This position deteriorated following the Lloyd’s thematic review where International Professional Indemnity insurance was identified as an under-performing class.
As a result, several Lloyd’s syndicates either withdrew from this class completely or dramatically curtailed their risk appetite. This lack of competition, coupled with a concerted attempt by insurers to recoup long term profitability, has led to market conditions deteriorating and increasingly challenging renewal discussions.
We have also seen claims activity within the legal sector as well as a general upwards trajectory in relation to claim severity contribute to the present state of the insurance market, in what has been widely reported as the hardest market conditions seen for 20 years since the demise of the Solicitors Indemnity Fund. These losses have acted as a deterrent to potential new capacity entering the market in order to stimulate competition and stabilise rising rates.
In the first half of this year we saw qualifying primary layer insurers continue to push for rate increases of between 10-20% for existing business. The 1 April renewals highlighted a growing gap in rate increases for firms performing well versus those with claims issues. Insurers are looking to avoid a scenario where they lose the most profitable firms and retain those that are performing badly from a claims perspective.
What’s more, given the recent easing of the Stamp Duty Land Tax threshold, Insurers will certainly be nervous regarding the prospect of any mistakes being made by law firms as buyers try to complete transactions prior to the Government deadline.
Whilst there remains a consistent number of primary layer insurers underwriting solicitors’ PI, they are becoming increasingly selective on the profile of firm they offer their capacity to. Whilst we have not seen primary layer insurers exit the market altogether, some have noticeably changed strategy looking to write more business on a co-insurance basis. One prominent insurer in the Solicitors PII sector has gone as far as to only offer terms on a 50% basis as standard.
Underwriters continue to look at renewals with increased scrutiny. They are exploring ways to lessen their exposure, thus requesting reduced limits, increasing self-insured excesses and imposing restrictions in some elements of cover that go beyond the Minimum Terms. There is also far greater scrutiny around firms’ financial stability given the obligation of insurers to offer six years run-off cover if a firm enters into administration and ceases to trade.
We expect to see the same challenges leading up to the 1 October renewals as the PI market continues to harden. While the full impact of COVID-19 on solicitors’ PI is still yet to be determined, insurers are using the pandemic as an additional reason to challenge pricing and ask probing questions. There is more focus on how firms have adjusted to conducting business and how they have addressed risk management challenges during lockdown, as well as how they propose to manage the process of returning to the workplace in whatever form that might take.
Historically excess layer insurer capacity was abundant and available at low premium rates. However, as a greater frequency of large claims continue to impact these layers underwriters are still under significant pressure to remedy their past rating deficiencies. In the excess layers up to a £10m limit of indemnity we have not seen any additional capacity enter the market and with lack of competition, this has allowed the remaining insurers to demand an increase in premiums. During the first half of 2021, we have seen excess layer rates increase by between 20-30% (and significantly higher on certain layers) and we expect to see this trend continue for the 1 October renewals.
The £7m in excess of £3m still remains the most challenging layer and is proving especially difficult for the firms with turnovers in excess of £20m, or for those who undertake a high proportion of conveyancing work. Consequently, we expect to see more co-insurance arrangements for increased limits of indemnity (e.g. £5m) on the primary layer in order to try and mitigate the effects of contracting competition and significant rate increases on this first excess layer.
We should also highlight Silent Cyber. From 1 January 2021, it became mandatory for PI underwriters to ensure that there is no ‘silent cyber’ (non-affirmative) cover under policies going forward. Insurers have therefore produced an endorsement applicable to 2021 excess layer renewals.
Some firms will be impacted more by these market trends than others, and it is our role as the broker to robustly resist the current market forces and articulate how our clients are managing the risks currently being faced.
For several years, we have advocated the establishment of strong relationships between our clients and incumbent or potential insurers. Given the current market conditions, this is crucial. Arranging pre-renewal meetings for our clients with their incumbent primary layer insurers, provides underwriters with a better understanding of the client’s business and brings their proposal form to life. The meetings would be very targeted in order to focus on the specific exposures within the firm. In these challenging times it is vital to explore alternative primary insurers and we will arrange the necessary meetings.
When seeking the best terms and coverage for our clients, our approach is different to many of our competitors. We negotiate individually with every insurer on a programme, rather than by using lineslips or facilities. This means that we are able to utilise a placing method known as BiPAR - a mechanism designed to foster competitive behaviour amongst insurers. Using this approach, we are able to foster competitive behaviour amongst insurers, and, whilst it is more labour intensive, results show that this produces the best outcomes for our clients.
We have been placing excess layer programs using BiPAR for several years, working with insurers to structure PI placements in the most cost-effective way. The hardening insurance market has highlighted the benefits of our approach where the blended premiums that were achieved helped to mitigate rate increases experienced by our clients.
The prevailing hard market conditions look set to continue for the coming 1 October renewals. However, our approach sets out a clear strategy of broking each client on its own merit, taking the conversation away from simply market conditions and portfolio rate increases. By challenging the insurance programme structures and diligent engagement with underwriters, ensuring they are providing terms based on the specific risk profile of the individual firm we are able to deliver the very best possible results for our clients.
